Thursday, March 05, 2015

“House of Cards” Illegally Distributed Throughout the World

On Friday February 27th, Netflix released the third season of “House of Cards” for subscribers to binge watch over the weekend. However, according to Variety, almost 700,000 people illegally downloaded the show’s newest season within the first 24 hours of its release. This is twice as many pirates (or illegal downloaders) as the show’s second season and the distribution of downloads was spread throughout the world.
Top ten nations with illegal downloaders of “House of Cards” Season Three:
1. China – 60,538
2. US – 50,008
3. India – 47,106
4. Australia – 40,557
5. Poland – 37,552
6. UK – 32,703
7. Canada – 27,584
8. France – 27,151
9. Greece – 20,551
10. Netherlands – 20,402
I would think that Netflix’s content would be pirated less often than most video content, because users can view it anytime and because Netflix allows up to four devices to stream from the same account at the same time. However, residents of five of the top ten countries –China, India, Australia, Poland, and Greece – do not have access to Netflix’s service yet.
Some of these countries do not rank very high in the Global IP Center’s International IP Index, so while an expansion of Netflix’s service could help diminish the number of illegal downloaders, it would not completely eliminate it. Of course, this is obvious because the United States, which ranks first in the International IP Index and where Netflix’s service is prevalent, had the second most illegal downloaders.
Theft of intellectual property should never be excused. With that said, more ubiquitous access to Netflix’s offerings on a legal basis might disincentivize people from pirating content. Not only might Netflix benefit from expanding its service, but artists and creators throughout the world would have a greater incentive to produce more content as piracy decreases.
As for the piracy that is occurring despite access to Netflix’s service, ongoing tools and initiatives, such as WheretoWatch.comRightscorp, and Brand Integrity Program Against Piracy, are working to reduce the size and scope of illegal content markets. (See this FSF blog for more.)
Netflix does have a plan in place to reach 200 countries by 2017, and hopefully, if implemented, it will reduce the amount of pirated content in the future. Strong IP rights are important for ensuring that content providers, artists, innovators, and marketers can earn a return on their ideas and labor, incentivizing more innovation, investment, and economic growth.  

Zero-Rating Could Kick-Start Internet Connections for Low-Income Persons

The Progressive Policy Institute released a March 2015 policy memo by Diana Carew entitled “Zero-Rating: Kick–Starting Internet Ecosystems in Developing Countries.” “Zero-rating” is when a consumer can access specific websites or applications for “free” (or without the data accessed counting towards the consumer’s data cap) because of an agreement between a content provider and mobile broadband provider. In her policy memo, Ms. Carew argues that zero-rating plans could play a huge role towards increasing connectivity in developing countries.
Ninety percent of the world’s unconnected individuals live in developing countries. Thus, there is little incentive for these individuals to spend the small amount of money that they have on an Internet connection if very few people around them are connected. Mobile data plans in the Philippines, for example, cost almost 10 percent of the per capita monthly national income, according to the ITU.
Less than 30 percent of Africa’s 1.1 billion people were connected to the Internet in 2014. Ms. Carew says that zero-rating plans could be the key towards transitioning a community from low-connectivity to high-connectivity:
The power of zero-rating to nourish an Internet ecosystem in poor and developing countries comes from its potential to increase connectivity by both people and businesses quickly and at low-cost. First, free access to popular sites like Google, Twitter, Wikipedia, and Facebook encourages more people to sign up for data plans, and enables greater data freedom to explore local content. Second, the increase in demand for local content spurs local businesses and entrepreneurs to create new online products and services—for example, information on Ebola outbreaks, typhoon warnings, or even wait times at local stores and government offices. Moreover, the higher share of population online justifies efforts of government agencies to go digital, which in turn encourages more business and individuals to join the internet ecosystem. Taken together, zero-rating can effectively jump start a virtuous feedback loop that moves the local economy into a high-connectivity equilibrium.
The economics is simple. If ISPs subsidize data for consumers in developing countries in order to increase the number of subscribers, this will increase the demand for more content. In other words, if an ISP provides “free” access to Google, Facebook, or Wikipedia, it may incentivize individuals to connect. Then, as individuals increasingly want to access more applications, they may be willing to switch to broader data plans which offer access to the entire Internet. This is not a new idea either. ISPs have often subsidized broadband plans in order to attract low-income consumers.
Granted, connecting the developing world will not be an overnight process. However, 45 percent of the world’s mobile providers already offer some form of zero-rating. If these providers (and additional providers) can find a way to market these plans to individuals in developing countries and/or develop more attractive plans, we may be on our way.
Although zero-rating plans have been criticized by Title II advocates, Ms. Carew argues that it is bad policy to simply prohibit them. In the United States, some consumers may not find zero-rating plans attractive, but many low-income consumers who only use mobile data to access a handful of applications could benefit from existing and/or emerging zero-rating plans.
Read more about zero-rating plans with relation to Net Neutrality in Randolph May’s Perspectives from FSF Scholars entitled “Net Neutrality v. Consumers.” Also, check out our blogs. (See here, here and here.)

Wednesday, March 04, 2015

Netflix to Wheeler: "We were only kidding!"

Please see the Variety story, "Netflix Now Says It Didn't Actually Want FCC to Regulate Broadband So Heavily," with this report:

"On Wednesday, Netflix chief financial officer David Wells, speaking at the 2015 Morgan Stanley Technology, Media & Telecom Conference, said the company wasn’t happy with the FCC move. He said that, while the streaming-video company wanted to see “strong” net neutrality measures to ensure content providers would be protected against ISPs charging arbitrary interconnection fees, Netflix would have preferred a lighter regulatory touch.

“Were we pleased it pushed to Title II? Probably not,” Wells said at the conference. “We were hoping there would be a non-regulated solution.”

Are you kidding me? Or was Netflix kidding FCC Chairman Tom Wheeler?

Everyone knows that Netflix was a leading -- if not the leading -- proponent of Title II regulation.

This must be a storyline for a very bad Netflix movie -- I don't know whether it's a comedy or a tragedy.

Thank the good Lord that the Commission always reserves "editorial privileges" to revise, even substantially, its orders before public release. Maybe there's time to rewrite the whole nightmare scenario!

Speakers Announced for FSF’s Seventh Annual Telecom Policy Conference – March 19

A power-packed lineup of speakers will present at the Free State Foundation’s Seventh Annual Telecom Policy Conference – "The Future of the Internet: Free Market Innovation or Government Control?" – Thursday, March 19, 2015, at the National Press Club in Washington, DC. In addition to leading senior officials and prominent experts from government, industry, academia, and think tanks, featured speakers include Opening Keynoter Rep. Greg Walden, Chairman, House Subcommittee on Communications and Technology; House Majority Whip Steve Scalise, a member of the House Subcommittee on Communications and Technology, participating in a  Lunchtime Conversation with Free State Foundation President Randolph May; and Closing Keynoter Sen. Ron Johnson, Chairman, Senate Committee on Homeland Security and Governmental Affairs, and a member of the Senate Subcommittee on Communications, Technology, and the Internet. Register now!

Tuesday, March 03, 2015

Netflix’s New Deal with iiNet Violates Net Neutrality

According to Gigaom, Netflix announced it will be coming to Australia and New Zealand on March 24th. Netflix also announced that it reached a deal with the Australian ISP iiNet to exempt all Netflix traffic from data caps. These deals, referred to as “zero-rating” plans, provide additional options for consumers. However, this deal would violate Net Neutrality because it discriminates against all content other than Netflix.

This would not be controversial since it is occurring in Australia if Netflix had not vocalized its support for Net Neutrality rules. The Verge contacted Netflix about its contradiction and it responded with the following message:
Zero rating isn’t great for consumers as it has the potential to distort consumer choice in favor of choices selected by an ISP. We’ll push back against such efforts, but we won’t put our service or our members at a disadvantage.
Read more about zero-rating plans with relation to Net Neutrality in Randolph May’s Perspectives from FSF Scholars entitled “Net Neutrality v. Consumers.”

Wednesday, February 25, 2015

Plain Packaging Mandates Push Tobacco Consumption into Black Markets

On February 15th, John Oliver’s HBO show “Last Week Tonight” featured a segment that tackled the tobacco industry. In the segment, Oliver showed disgust that tobacco companies have become more profitable over time despite decreasing rates of tobacco consumption.
There is an easy explanation for this. Tobacco products are heavily regulated and taxed in most states throughout the US. The costs of these regulations and taxes push smaller tobacco companies who cannot afford them out of the market. This leaves larger market shares and profit shares for the bigger companies who can afford to cover the costs of these regulations. So while John Oliver is supporting heavy regulations because he thinks they are reducing the profits of these big tobacco companies, in reality, these companies are benefitting from them.
Oliver pointed to the Australian tobacco market and praised its government for its plain packaging mandate, which eliminates branding and requires all similar tobacco products to look the same. Oliver suggested that the United States adopt a similar policy because tobacco companies are too profitable and he claims such a policy would help lower tobacco consumption. Not only is a plain packaging mandate a massive violation of intellectual property rights because it strips companies of their trademarks and branding, but there is also no evidence that the Australian plain packaging regulations have caused lower levels of tobacco consumption.
Sinclair Davidson and Ashton de Silva, authors of “The Plain Truth about Plain Packaging: An Econometric Analysis of the Australian 2011 Tobacco Plain Packaging Act” found that the plain packaging policy introduced in Australia “has not reduced household expenditure[s] of tobacco once we control for price effects.” The last part is important because over the same span that plain packaging was introduced, Australia imposed a 12.5 percent excise tax increase. This tax increase likely is the driver of any decreases in tobacco consumption, not plain packaging regulations.
Ernst & Young LLP also released a paper entitled “Historical Trends in Australian Tobacco Consumption: A Case Study” which found “no evidence that plain packaging in Australia has reduced total consumption to date.” But plain packaging has had an effect on the tobacco market. Since Australia’s mandate went into effect, consumption of black market tobacco products has increased by roughly 55 percent. Because the supply of black market tobacco products has increased, the access to children has also increased, resulting in a 30 percent hike in daily smoking rates of 12-17 year olds, according to the International Property Rights Index. I doubt these are the results John Oliver is trying to promote.
Granted, these are results from Australia, but the results should not go unnoticed. We already know that tobacco tax rates are so high in some states in the US that individuals are selling “loose cigarettes” despite the aggressive enforcement from police. Removing trademarks and branding, which tobacco users place a high value on, would violate the intellectual property rights of tobacco companies and certainly would push tobacco consumption into a black market.

Tuesday, February 24, 2015

Is the FCC Unlawful? – A Reprise

This Thursday, February 26, will be a fateful day for the future of the Internet. As I wrote recently in a Washington Times op-ed, “The FCC’s Coming Internet Regulations,” “in the nearly 40 years that I have been involved in communications law and policy, including serving as FCC Associate General Counsel, this action, without doubt, is one of the agency’s most misguided.”

As the vote approaches, I don’t have any second thoughts regarding that statement. Reduced to its essence, the way I put it at the beginning of the Washington Times piece gets to the nub of the matter: “Regulating Internet providers as public utilities in order to enforce net neutrality mandates will discourage private sector investment and innovation – and lead to even more special interest pleading at the FCC for favored treatment, and heightened litigation for years to come.

For those interested in learning more about the forthcoming decision of the FCC’s Democrat majority to regulate Internet providers, even wireless companies, there are literally dozens, if not hundreds, of publications on the Free State Foundation’s website and its blog. And in a moment, I want to call your attention especially to three pieces published just within the past two weeks that are worthy of your attention.

But first this: The initial essay I published this year, on January 2, was titled, “A Question for 2015: Is the FCC Unlawful?” The piece bears revisiting as the FCC is poised to expand its control over the Internet in ways that threaten its future without any present justification – that is, without a justification that is not trumped up. The reality is that there is no evidence of present market failure and consumer harm that justifies the Commission asserting more control over the Internet – regardless of which theory of law the Commission relies upon.

But here’s an important point I wish to make regarding the FCC “lawfulness” in advance of Thursday’s vote. As Philip Hamburger discusses in his new book, “Is Administrative Law Unlawful?”, one of the objectives of our Founders was to control, if not eliminate, what in England was known as the “dispensing” power. Simply put, the “dispensing” power – and this power is much discussed in English constitutional history – was a form of exercise of royal prerogative under which the King could avoid, or dispense with, complying with particular laws, including those enacted by Parliament. As Professor Hamburger discusses at some length, today’s administrative agencies, in essence, have resurrected the “dispensing” power by the way they often use waivers to award favored treatment.

Here is the way Professor Hamburger puts it:

“After administrators adopt a burdensome rule, they sometimes write letters to favored persons telling them that, notwithstanding the rule, they need not comply. In other words, the return of extralegal legislation has been accompanied by the return of the dispensing power, this time under the rubric of ‘waivers.’”

And then he goes to the heart of the matter:

“Like dispensations, waivers go far beyond the usual administrative usurpation of legislative or judicial power, for they do not involve lawmaking or adjudication, let alone executive force. On the contrary, they are a fourth power – one carefully not recognized by the Constitution.”

Now, I understand that seeking and receiving “waivers” of the FCC’s rules (regardless of the precise name applied to such dispensations) is an established part of FCC practice. And in some instances, such waivers, in light of unique circumstances or hardships, are no doubt justified. But I am convinced that under the new set of Internet regulations about to be adopted by the Commission, we are likely to witness the exercise of the agency’s “dispensing” power – this power which the Founders wished to eliminate – in ways, and to such an extent, that rule of law norms at the FCC will be called into further question.

This is what I meant when I said above that the new regulations are likely to raise pleading for special treatment and favors to new heights at the FCC. As the agency gains even more control over various participants in the Internet and communications marketplace, it will be subject to increasing pressures to use its dispensing power to grant this or that company (or market segment) favored treatment. For example, despite FCC protestations to the contrary, which protestations, by the way, do violence to the ordinary usage of the English language, the FCC will regulate the rates of some firms but not others, by holding unlawful the usage plans, sponsored data, or zero-rating plans, of some firms and not others. Or, to be sure, under its new inherently vague “good conduct” rule, the agency will be granting dispensations to some firms and not others, based on the exercise of discretion untethered to any standard in any law duly enacted by Congress.

This is part of what I mean by asking the question: “Is the FCC Unlawful?”

Now, for further readings in advance of the FCC’s February 26 vote (if you haven’t had a chance to read them already, I commend to you these excellent Perspectives from FSF Scholars published in the past two weeks: 

Each of them alone makes a convincing case that the course upon which the agency is about to embark – imposing Title II public utility regulation on Internet providers – will be harmful to consumers and to the future development of the Internet by thwarting investment, innovation, and consumer choice. Taken together, the case is devastating.

Now the act of imposing public utility regulation on Internet providers that I decried this past September in “Thinking the Unthinkable” is about to become reality. In the aftermath of the significant extension of government control over the Internet that, absent intervention by the courts or Congress, will ensue, I am convinced the question I posed at the beginning of the year – “Is the FCC Unlawful?” – will be asked with increasing frequency and seriousness of purpose.  

Thursday, February 19, 2015

Despite What FCC Chairman Wheeler Says, His Proposal Will Increase Taxes

The common perception among Title II opponents is that reclassification of broadband as a telecommunications service would levy a massive amount of new taxes and fees on Internet users. Robert Litan and Hal Singer of the Progressive Policy Institute estimated in a December 2014 policy brief that Title II regulations will add about $11 billion in new taxes.
Free Press claims that the extension of the Internet Tax Freedom Act (ITFA) by Congress eliminates the possibility of Title II reclassification resulting in any new taxes or fees. Now that FCC Chairman Tom Wheeler released a synopsis of his proposal (he has not released full proposal to the public), it is important that we get a straight answer.
Although Chairman Wheeler did not mention anything about new taxes or fees in his Wired blog post on his proposal on February 4th, the FCC Fact Sheet on the proposal clearly states:
The Order will not impose, suggest or authorize any new taxes or fees – there will be no automatic Universal Service fees applied and the congressional moratorium on Internet taxation applies to broadband.
So it is clear? Chairman Wheeler’s proposal to reclassify broadband under Title II will not add any new taxes or fees, right? Wrong!

FCC Commissioner Ajit Pai released a February 6th
statement on the 332 page proposal stating:
The plan explicitly opens the door to billions of dollars in new taxes on broadband. Indeed, states have already begun discussions on how they will spend the extra money. These new taxes will mean higher prices for consumers and more hidden fees that they have to pay.
Okay, so which statement is true?
Mr. Litan and Mr. Singer clarified the results of their paper in a blog post after Free Press claimed the findings were inaccurate due to the extension of the ITFA. Despite the passing of ITFA which generally bans Internet sales and access taxes, the Litan and Singer policy brief takes into account state-based telecom related fees for which there is no federal preemption.
Additionally, Hal Singer wrote a Forbes article after Chairman Wheeler released his blog. He said that even if the proposal does not include any new federal taxes, “state and local fees that apply to the ‘obligations of a telecommunications carrier’ could easily be extended to Internet service after reclassification.” Mr. Litan and Mr. Singer estimated in their policy brief that Title II regulations will cause annual state and local fees levied on wireline and wireless broadband subscribers to increase by $67 and $72, respectively.
Here is what seems to be going on. Chairman Wheeler is promising forbearance from the imposition of new taxes and fees, but he has no control over the actions of state and local governments which levy taxes on telecommunications providers. Additionally, the forbearance process likely will take months to years to complete and Chairman Wheeler has no authority to overrule the decisions of current or future commissioners. In other words, the proposal promises no new taxes, not because Title II regulations do not levy them, but because Chairman Wheeler hopes that future commissioners will vote to take federal taxes off the table and that state and local governments will not levy existing tax laws on Internet service providers. At least, this is the political agenda Chairman Wheeler is promoting at the moment.
When it comes to the forbearance of new taxes and fees under Title II, we should expect the worst and hope for the best. Unfortunately, the uncertainty of the forbearance process is enough to ensure that not all taxes and fees, if any, will be eliminated from Title II regulations.

Tuesday, February 17, 2015

Congress Should Pursue Royalty Reforms Urged in Copyright Office Report

One of the basic purposes of government is to protect private property rights. Article I, Section 8 of the U.S. Constitution recognizes copyright as property right and empowers Congress to secure royalties for copyright holders. But when it comes to copyright in sound recordings and music performances, current federal policy contains critical flaws. Reforms are needed to provide more adequate and equal protection for those rights.
A report issued by the Copyright Office on February 5 sets out laudable principles for moving copyright policy in a more free market-based and equitable direction. The report also recommends specific measures to improve copyright policy.
Congress should take the Copyright Office report’s principles and recommendations seriously. It should act to ensure public performance rights apply equally to all technology platforms, including terrestrial broadcast radio. Similarly, Congress should adopt a uniform, market-based rate standard for royalties that is applicable to all platforms. And it is noteworthy that the Copyright Office Report acknowledges that, in one way or the other, public performances of sound recordings made prior to 1972 should be subject to compensation so that the property rights of artists and creators of the pre-1972 recordings are secured.
As a general matter, current federal copyright law recognizes that public “performances” of musical sound recordings by commercial music service providers entitle the holder of a song’s copyright to royalty payments. But when the copyright’s holder and providers of music services cannot agree on royalties, federal law imposes a compulsory licensing and rate requirement. For most music services, the Copyright Royalty Board conducts ratemaking proceedings to establish sound recording copyright holder royalties. Copyright Judges set rates for traditional media like CDs and vinyl and for Internet-based digital music services. They also set rates for satellite providers, non-commercial broadcasting, and certain cable providers.
According to the Register of Copyrights, “[t]here is a widespread perception that our licensing system is broken.” This month, the Copyrights Office released its lengthy report, titled “Copyright and the Music Marketplace.” The report lays down several guiding principles for reform of federal copyright policy regarding sound recordings and music public performances. Among them:
  • Government licensing processes should aspire to treat like uses of music alike.
  • Government supervision should enable voluntary transactions while still supporting collective solutions.
  • A single, market‐oriented ratesetting standard should apply to all music uses under statutory licenses.
Based on those and other principles, the report offers a series of preliminary recommendations for copyright policy change. Three report recommendations for advancing parity in licensing deserve particularly close attention from Congress.

First, Congress should: “Extend the public performance right in sound recordings to terrestrial radio broadcasts.” Existing law allows broadcasts of copyrighted music content without any need for copyright holders’ mutual agreement. But it is only equitable that terrestrial or over-the-air broadcast radio should have to respect performance rights of copyright holders. Current policy unfairly gives terrestrial broadcast radio a privileged position vis-à-vis commercial music services that use different transmission technologies and business models. This puts satellite and at a competitive disadvantage. A 2013 Green Paper by the Department of Commerce made these same points. It is now time for Congress to act.
Second, Congress should: “Adopt a uniform marketbased ratesetting standard for all government rates.” The current federal policy of applying varying rate standards dependent on the underlying service technology is nonsensical and should be discarded. And in achieving uniformity in rate standards, Congress should prefer a standard that at least seeks to approximate free market outcomes rather than perform protectionist functions.
That is, Congress should only apply a “willing buyer/willing seller” standard for “reasonable” rates, definable as payments that “most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” This standard currently applies to non-interactive Internet-based digital music services such as Pandora, Spotify, and iHeartRadio – but not to cable and satellite video service providers. Congress should jettison the so-called 801(b) rate standard, which among things is calculated to “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.” As I have written previously, Section 801(b)’s “anti-disruption proviso epitomizes what is wrong with the existing regulatory regime controlling music copyright royalties.”
Finally, it is useful that the Copyright Office Report acknowledges that the performance of pre-1972 sound recordings should be subject to compensation. While the Copyright Act of 1976 largely preempted state copyright law, Section 301(c) left intact state jurisdiction over rights in sound recordings fixed before February 15, 1972. The issue of state copyright protection in pre-72 sound recordings has been the subject of recent litigation involving digital music services such as Sirius XM. To date, courts that squarely faced the issue have recognized the existence of public performance rights under state law causes of action for copyright holders in pre-72 sound recordings. These recent cases are significant developments because the courts recognize that artists and creators of pre-1972 recordings have property interests that may not be misappropriated without compensation.
The report considers full federalization of the pre-1972 recordings – that is, federal field preemption of state law – one approach to achieving the desired result of ensuring compensation for performance of such recordings. Another possible approach is embodied in the RESPECT ACT. This previously introduced legislation does not preempt the field of state law protection in pre-1972 sound recordings as such. Instead, it provides that digital music services providers – such as Internet radio, cable, or satellite – must pay royalties for public performances of pre-1972 sound recordings in the same manner as they now do for post-1972 sound recordings. The RESPECT ACT would make such payment a safe harbor from state copyright infringement claims.
It may be that the federalization approach would be an acceptable means of achieving proper compensation for use of the pre-1972 recordings. And if so, there may be other changes in the Copyright Act – such as improving the efficacy of the DMCA procedures – that should accompany such federalization. In any event, it is important that the property rights in pre-1972 sound recordings be secured.  

The Copyright Office report contains many other reform proposals worth considering. But the report recommendations for advancing parity in licensing should be critical components of any congressional efforts to reform copyright policy for sound recordings and music performances. Congress should act to make copyright policy more amenable to free market transactions and to equitable treatment of music copyright holders and music service providers alike.